What Is Financial Risk Management?

Risk is inherent in any business operation and good risk management is essential if you're going to
identify and stop revenue leakage from your business. Of the various types of risks your business might
face, financial risk has the most immediate impact on your cash flows and bottom line. You can
anticipate these risks and head them off at the pass with a solid financial risk management plan.

is the process of understanding and managing the financial risks that your business might be facing
either now or in the future. It's not about eliminating risks, since few businesses can wrap themselves in
cotton wool. Rather, it's about drawing a line in the sand. The idea is to understand what risks you're
willing to take, what risks you'd rather avoid, and how you're going to develop a strategy based on your
risk appetite.

The key to any financial risk management strategy is the plan of action. These are the practices,
procedures and policies your business will use to ensure it doesn't take on more risk than it is prepared
for. In other words, the plan will make it clear to staff what they can and cannot do, what decisions need
escalating, and who has overall responsibility for any risk that might arise.

How Do You Implement Financial Risk Control?

Organizations manage their financial risk in different ways. This process depends on what the business
does, what market it operates in and the level of risk it is prepared to accept. In this sense, it's up to the
business owner and directors of the company to identify and assess the risk and decide how the
company is going to manage them.

Some of the stages in the financial risk management process are:

Identifying the risk exposures

Risk management starts by identifying the financial risks, and their sources or causes. A good place to
start is with the company's balance sheet. This provides a snapshot of the debt, liquidity, foreign
exchange exposure, interest rate risk and commodity price vulnerability the company is facing. You
should also examine the income statement and the cash flow statement to see how income and cash
flows fluctuate over time, and the impact this has on the organization's risk profile.

Questions to ask here include:

What are the main sources of revenue of the business?

Which customers does the company extend credit to?

What are the credit terms for those customers?

What type of debt does the company have? Short-term or long-term?

What would happen if interests rates were to rise?

Quantifying the exposure

The second step is to quantify or put a numerical value on the risks you've identified. Of course, risk is
uncertain, and putting a number on risk exposure will never be exact. Analysts tend to use statistical
models such as the standard deviation and regression method to measure a company's exposure to
various risk factors. These tools measure the amount by which your data points differ from the average
or mean.

For small businesses, computer software like Excel can help you to run some straightforward analysis in
an efficient and accurate way. The general rule is the greater the standard deviation, the greater the risk
associated with the data point or cash flow you're quantifying.

Making a "hedging" decision

After you've analyzed the sources of risk, you must decide how you will act on this information. Can you
live with the risk exposure? Do you need to mitigate it or hedge against it in some way? This decision is
based on multiple factors such as the goals of the company, its business environment, its appetite for risk
and whether the cost of mitigation justifies the reduction in risk.

Generally, you might consider the following action steps:

Reducing cash-flow volatility.

Fixing interest rates on loans so you have more certainty in your financing costs.

Managing operating costs.

Managing your payment terms.

Putting rigorous billing and credit control procedures in place.

Saying farewell to customers who regularly abuse your credit terms.

Understanding your commodity price exposure, that is, your susceptibility to variations in the price of
raw materials. If you work in the haulage industry, for example, a rise in oil prices can increase costs and
reduce profits.

Making sure the right people are given the right jobs with the right degree of supervision, to reduce the
risk of fraud.

Performing due diligence on projects, for example, considering the uncertainties associated with a
partnership or joint venture.

Who Manages Financial Risk?

In a small business, the business owner and senior managers are responsible for risk management. It's
only when the business grows to include multiple departments and activities that you may wish to bring
in a dedicated Financial Risk Manager to manage risk — and make recommendations for action — on
behalf of the company.

The Global Association of Risk Professionals is recognized globally as the premier accreditation for
Financial Risk Management professionals. To receive the FRM certification, candidates must have two
years' work experience and pass a rigorous exam risk on the subjects of market risk, credit risk,
operational risk and investment management. Details are available on the GARP website.

Technological Institute Of the Philippines

Manila
FINANCIAL RISK MANAGEMEMT

submitted to;
Dr. Danilo Vidal

Submitted by;
Razon, Jeraldine Nicole S.
Fm21FB1
July 15 , 2019